Clipped from: https://economictimes.indiatimes.com/wealth/insure/does-your-insurance-company-have-money-to-pay-claims-easily-find-out-here/articleshow/97435842.cms
We buy insurance policies to financially secure the future of our loved ones in the time of unexpected and untimely events such as loss of life, loss of property, etc. Therefore, as a policyholder, it is important for you to know about the company’s overall financial health and capability to pay the claims. The solvency ratio is one of the key determinants that suggests whether an insurer can stay solvent in the long run or not. Let’s understand what it is and how it works.
Ever wondered whether your insurance company has enough money to pay your claims? Imagine a similar situation like the Covid-19 pandemic or a natural calamity like an earthquake which has put massive financial burden on your insurance company. Does your insurer have enough capital to pay out such large number of claims and remain viable in the future also? After all, we buy insurance policies to financially secure the future of our loved ones in the time of unexpected and untimely events such as loss of life, loss of property, etc. If the insurer cannot pay the claim when you need it the most, then the purpose of buying insurance goes in vain.
Therefore, as a policyholder, it is important for you to know about the company’s overall financial health and capability to pay the claims. You can assess the financial health of an insurance company by reviewing its critical financial ratios.
The solvency ratio is one of the key determinants that suggests whether an insurer can stay solvent in the long run or not. Let’s understand what it is and how it works.
What is a solvency ratio?
The solvency ratio of an insurance company is the size of its capital compared to the risk the company has taken as a part of its business. Simply put, the solvency ratio is a measurement of how much the insurance company has in assets versus how much it owes. It is one of the basic measurements to assess how financially sound the insurance company is and its overall ability to pay claims. It is measured as:
Solvency Ratio = Available Solvency Margin (ASM) – Required Solvency Margin (RSM)
Where ASM is the value of the company’s assets over liabilities. RSM is based on net premiums and defined as per the guidelines of Irdai.
Insurance companies are often required by regulators to maintain a certain level of solvency in order to continue operating. A strong solvency ratio means that the company is financially stable. On the other hand, if the solvency ratio is weak, it may indicate that the insurer is at risk of becoming insolvent.
All insurance companies in India are required to maintain a solvency ratio of 150 per cent or 1.5 to minimise the risk of bankruptcy as per the current regulations by the Insurance Regulatory and Development Authority of India (Irdai). Higher the solvency ratio, stronger will be the financial capability of the company to deal with any surge in claims.
How to check the latest solvency ratios of the life insurance companies
Irdai has mentioned the solvency ratios of all life and general insurance companies in its annual report of 2021-22. As on March 31, 2022, all 24 life insurers maintained the mandated solvency ratio of 1.5 set by the regulator.
Bajaj Allianz Life Insurance has registered the highest solvency ratio of 5.81, as per Irdai data. Bharti AXA Life Insurance Co. Ltd and IndiaFirst Life Insurance Co. Ltd. Recorded a solvency ratio of 1.62 and 1.65, respectively. Life Insurance Corporation of India had a solvency ratio of 1.85.
Solvency ratio of life insurers in 2021-22
|Private Sector Insurers|
|Sahara India Life Insurance Co. Ltd.||9.58||9.53||9.23||6.75|
|Bajaj Allianz Life Insurance Co. Ltd.||6.48||6.26||6.04||5.81|
|Pramerica Life Insurance Co Ltd||4.17||3.90||3.86||4.04|
|Aegon Life Insurance Co. Ltd.||2.74||2.93||2.89||3.33|
|Ageas Federal Life Insurance Co. Ltd.||3.08||3.03||3.14||3.12|
|Canara HSBC Life Insurance Co. Ltd.||2.88||2.72||2.74||2.82|
|Kotak Mahindra Life Insurance Co. Ltd.||2.57||2.61||2.66||2.73|
|Reliance Nippon Life Insurance Co. Ltd.||2.35||2.34||2.30||2.35|
|Exide Life Insurance Co. Ltd.||2.19||2.07||2.02||2.17|
|Edelweiss Tokio Life Insurance Co Ltd||1.84||2.06||1.90||2.11|
|PNB MetLife India Insurance Co. Ltd.||1.80||1.80||1.80||2.09|
|SBI Life Insurance Co. Ltd.||2.15||2.12||2.09||2.05|
|Shriram Life Insurance Co. Ltd.||2.38||2.11||2.06||2.05|
|ICICI Prudential Life Insurance Co. Ltd.||1.94||2.00||2.02||2.04|
|Max Life Insurance Co. Ltd.||1.97||2.11||2.07||2.01|
|Star Union Dai-ichi Life Insurance Co. Ltd.||2.06||1.82||1.86||2.00|
|TATA AIA Life Insurance Co. Ltd.||1.95||1.86||1.79||1.96|
|Aditya Birla Sun Life Insurance Co. Ltd.||1.82||1.89||1.94||1.88|
|Future Generali India Life Insurance Co. Ltd.||1.84||1.53||1.50||1.83|
|Aviva Life Insurance Co. Ltd.||2.22||2.23||2.32||1.82|
|HDFC Life Insurance Co. Ltd.||2.03||1.90||1.90||1.76|
|IndiaFirst Life Insurance Co. Ltd.||1.76||1.60||1.61||1.65|
|Bharti AXA Life Insurance Co. Ltd.||1.73||1.88||1.67||1.62|
|Public Sector Insurer|
|LIC of India||1.73||1.83||1.77||1.85|
Source: IRDAI Annual Report 2021-22
Disclaimer: IRDAI restricted Sahara India Life Insurance from seeking new business in June, 2017
A look at the solvency ratio of general and health insurers in 2021-22
|Insurers||June 2021||September 2021||December 2021||March 2022|
|Private Sector Insurers|
|Shriram General Insurance Co. Ltd.||3.63||4.05||4.70||4.62|
|Bajaj Allianz General Insurance Co. Ltd.||3.40||3.50||3.33||3.44|
|Liberty General Insurance Ltd.||2.81||2.85||2.87||2.87|
|ICICI Lombard General Insurance Co. Ltd.||2.76||2.51||2.45||2.46|
|Raheja QBE General Insurance Co. Ltd.||2.59||2.76||2.19||2.22|
|Royal Sundaram General Insurance Co. Ltd.||1.97||2.07||2.14||2.10|
|Go Digit General Insurance Ltd.||1.81||1.64||1.64||2.01|
|Tata AIG General Insurance Co. Ltd.||2.32||2.17||2.11||1.97|
|Cholamandalam MS General Insurance Co. Ltd.||2.00||1.77||1.86||1.95|
|Universal Sompo General Insurance Co. Ltd.||2.07||2.06||2.09||1.92|
|Navi General Insurance Ltd.||2.28||1.67||2.15||1.91|
|SBI General Insurance Co. Ltd.||2.10||2.04||1.93||1.85|
|Kotak Mahindra General Insurance Co. Ltd.||1.75||2.66||2.35||1.79|
|Magma HDI General Insurance Co. Ltd.||1.82||1.82||1.61||1.76|
|Acko General Insurance Ltd.||2.31||1.61||1.77||1.68|
|IFFCO Tokio General Insurance Co. Ltd.||1.63||1.51||1.74||1.68|
|Edelweiss General Insurance Co. Ltd.||1.83||1.79||1.77||1.67|
|Future Generali India Insurance C. Ltd.||1.56||1.58||1.64||1.66|
|Reliance General Insurance Co. Ltd.||1.65||1.69||1.69||1.66|
|HDFC ERGO General Insurance Co. Ltd.||1.69||1.71||1.70||1.64|
|Bharti AXA General Insurance Co. Ltd.*||NA||NA||NA||NA|
|Public Sector Insurers|
|The New India Assurance Co. Ltd||2.00||1.90||1.83||1.66|
|National Insurance Co. Ltd.#||0.05||0.01||0.09||1.09|
|The Oriental Insurance Co. Ltd.#||0.50||0.12||0.15||1.03|
|United India Insurance Co. Ltd.#||0.83||0.74||0.72||1.02|
|Agriculture Insurance Co. of India Ltd.||1.88||1.88||2.40||2.45|
|Stand-alone Health Insurers|
|HDFC ERGO Health Insurance Co. Ltd.**||NA||NA||NA||NA|
|Reliance Health Insurance Ltd.***||–||–||–||–|
|Care Health Insurance Ltd.||1.81||1.90||1.68||1.85|
|Aditya Birla Health insurance Co. Ltd.||1.61||1.73||1.84||1.77|
|Niva Bupa Health Insurance Co. Ltd.||1.65||1.66||1.78||1.72|
|ManipalCigna Health Insurance Co. Ltd.||1.65||1.77||1.59||1.68|
|Star Health and Allied Insurance Co. Ltd.||1.65||1.71||1.80||1.67|
|General Insurance Corporation of India||1.74||1.88||1.80||1.96|
|#Solvency for the quarter ending on March 31, 2022 is with forbearance.|
|*Demerger of general Insurance business of Bharti AXA General Insurance Co. Ltd. to ICICI Lombard General Insurance Co. Ltd. w.e.f. April 01, 2021.|
|**Erstwhile HDFC Ergo Health Insurance Co. Ltd. merged with HDFC Ergo General Insurance Co. Ltd. w.e.f. March 01, 2020.|
|***Takeover of Reliance Health Insurance portfolio by Reliance General Insurance Co. Ltd. NA — Not applicable|
|Note: Re-classiﬁcation/re-grouping by the insurers in the previous year’s ﬁgures, if any, has not been considered..|
Source: Irdai Annual Report 2021-22
Do remember that the solvency ratio and liquidity are not the same. Liquidity indicates whether the insurance company has enough capital to pay the short-term debt while solvency is the ability to pay all debt which includes long-term debt. Hence, the solvency ratio is a good indicator of an insurance company’s capacity to meet its short-term and long-term liabilities.
Why solvency ratio is important for policyholders
As you need your insurance company during insured events which are often uncertain, it is important to check the company’s financial health before purchasing a policy. It will be difficult for the insurance company to pay claims if it does not maintain an adequate solvency margin over the last few years.
“Higher solvency ratio means that the insurance company is financially stable and has a strong ability to pay claims to policyholders. It can provide reassurance that the insurer will be able to fulfill its obligations and pay claims in the event of a loss” said Sanjiv Bajaj, Jt. Chairman & MD, Bajaj Capital Ltd.
A strong solvency ratio could also play an important factor when renewing an existing insurance policy. “Policyholders may also have more confidence in the insurer’s ability to stay in business over the long-term, which can be important when choosing a policy or deciding to renew an existing one,” Bajaj added.
Policyholders should not see the solvency ratio in isolation. “It is imperative for customers to comb for an insurance company that is reliable, reputable, and will be able to provide financial support to families in times of emergency. For the policyholder, this ratio is a sign of trustworthiness indicating that the insurance company has an adequate financial buffer to settle all the claims in an extreme situation and manage its other debt obligations,” said Tarun Mathur, Chief Business Officer – General Insurance, Policybazaar.com.